Educational Articles

Dow-30 Earnings: Alcoa Inc. - First Quarter 2013

Dominic B. Silva
| April 09, 2013

Alcoa (AA - Free Alcoa Stock Report), a global aluminum producer and Dow-30 component, reported mixed results for the 2013 first-quarter. Sales of $5.83 billion fell below lowered expectations ($5.99 billion) and the previous-year's tally of $6.01 billion, as weaker London Metal Exchange (LME) aluminum prices and curtailed production levels in the upstream realm, loomed large. Conversely, conditions in the company's downstream area were healthier, led by ongoing resurgence in the aerospace and automotive end markets. This, together with a better sales mix and continued productivity improvements across all businesses, enabled Alcoa to meet our $0.11 share-net estimate, and generally top Wall Street’s forecasts.

Even if the company's 2013 projections for global aluminum demand growth of 7% prove accurate, there are a number of obstacles on the forefront. Most important is excess global supply, which has resulted in nearly two years of flat or falling prices on the LME. The shiny metal has been part of a broad selloff in commodities recently, leaving it in a price range between $1,850 and $1,900 a ton, which is sharply below the $2,500-a-ton mark reached merely two years ago.

To make matters worse, China, the world's biggest maker of aluminum, is rumored to be on pace to boost production by nearly 10% in 2013, to roughly 25 million tons. While many of its facilities are probably operating at unprofitable levels, likely state intervention (subsidies and/or favorable power contracts) has encouraged managers to maintain production lines.

Concurrently, the metal's demand remains sluggish. Most countries in the euro zone continue to exhibit contracting or lackluster economic activity and China's consumption and manufacturing rebound appears to be more moderate than previously anticipated. Taking these factors into account, we are uncertain when sector fundamentals will perk up. Accordingly, we have lowered our sales and share-profit estimates by $560 million and a dime, to $24.20 billion and $0.50, respectively, for 2013.

Alcoa remains steadfast in its mission to curtail costs. In 2012, it shuttered 531,000 tons of smelting cutbacks, or 12% of total capacity. Measures to cut expenses have resulted in substantial benefits, but forces outside its control are proving to be detrimental. As a result, it will have to take additional efficiency-boosting steps. The impending completion of a $11 billion mining, smelting, and manufacturing facility in Saudi Arabia ought to help, lowering Alcoa's position on the cost curve. Sluggishness in the share price has prompted certain investors to seek asset sales, with the bauxite business, which is largely dependent on LME prices, being the focus. However, given the tepid operating environment, management would be hardpressed to find buyers willing to meet its asking price.

Recent years have been hard on aluminum makers. After being ranked as the most valuable materials company globally a decade ago, Alcoa barely cracks the top 100. Too, two-thirds of this Pittsburgh-producer's market capitalization has been wiped out. Rio Tinto, a mining and aluminum behemoth, has taken $25 billion in assets writedowns on Alcan, the aluminum business it purchased in 2007 for $37.4 billion.

Our long-term outlook for aluminum is more favorable. Commercial aerospace manufacturers are scheduled to produce record number of passenger jets over the next several years. Elsewhere, countries globally have/are calling for better fuel-efficiency standards, which is primarily being achieved by greater usage of aluminum.

About The Company: Alcoa Inc., a Pennsylvania corporation, is a global leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined. It supplies the aerospace, automotive, building and construction, commercial transportation, and industrial markets. It has more than 300 operating and sales locations in over 30 countries. Sales of aluminum and alumina account for more than three-fourths of Alcoa’s total revenues. It also produces nonaluminum products, such as precision castings and fasteners for the aerospace and industrial markets. Alcoa’s operations consist of four worldwide reportable segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions.

At the time of this writing, the author did not have positions in any of the companies mentioned.